Western Bank Survey: Boards Need Risk Management Expertise

By: Emily McCormick, director of research for Bank Director

June 17th, 2013 |

What skills do community banks value in new board members? A recent phone survey conducted by Bank Director of 114 community bank CEOs, presidents and chairmen in the Western United States found that 36 percent value risk management experience most when considering the addition of a new board member. This emphasis on risk represents a growing trend for bank boards and management: A previous Bank Director survey on compensation found that 58 percent of directors are spending a lot of their time in board meetings on risk.

Other respondents indicate that they seek directors with more knowledge of audit issues, at 7 percent, or a regulatory background, at 4 percent. Nine percent of survey respondents indicate that they value technology expertise most when adding a new member to the bank board.

What expertise do you value most when considering the addition of a new board member?

Randy Harris, chief executive officer of The Bank of Clovis, a $169-million bank headquartered in Clovis, New Mexico, values directors with the ability to look at the bank’s overall risks, and despite the bank’s small-town location, he hasn’t seen any difficulty in finding directors with the right expertise. “Anyone that’s been in business themselves has had to evaluate different levels of risk within their own business,” he says.

Fifty-four percent of respondents cite compliance as the category of risk that concerns them most. “The regulators are costing small banks a tremendous amount of money,” says Byron Kluth, president of The First State Bank of Shelby, a $142-million asset family-owned commercial bank based in rural Shelby, Montana, adding that compliance costs have a deeper impact at community banks like his own. Chuck Stones, president of the Kansas Bankers Association, concurs. “Right now, bankers are just feeling like they’re beat over the head with Dodd-Frank,” he says.

What risk category is of the greatest concern for your bank?

Despite regulatory concerns, neither Harris nor Don Murray, chief executive officer of Commerce Bank of Temecula Valley, a $51-million bank based in Murrieta, California, have felt pressured by regulators to add directors with more skills in risk or similar areas. Murray says that these decisions are internally-driven, and while he indicates that compliance risk is a concern, he feels that the bank board, with the planned addition of two new directors skilled in risk and audit, is prepared to address looming risks.

Twenty-six percent of community banks surveyed felt community ties and business development skills are the most important attribute for prospective board members. These banks likely aren’t overlooking specific skills, but seeking to add board members with varied skill sets as well as the connections required to grow the business. Stones also feels that some banks in smaller communities might find it difficult to find highly specialized directors.

“I think it’s probably hard in a smaller community to find true expertise” in areas like risk or audit, says Stones. He uses the example of a farmer joining the board of a rural bank. “Risk management is a huge factor in farming as well as, in most cases, technology,” he says. “An overall business expertise is probably more important to most community bankers than going out and finding someone with specific expertise.”

The local ties of the bank board are often a vital part of the growth strategy of many community banks. Seventy-four percent of survey respondents indicate that they expect the loan portfolio to be the largest source of the bank’s growth. But growth may not come easy. In Kansas, Stones says that the loan environment is very competitive, and he hears that banks are stealing loan producers from other institutions as a way to expand the bank’s loan portfolio.

What is the biggest part of your bank’s growth strategy?

Even with skilled directors in place, the seemingly constant barrage of regulations from Washington highlight the need for board education. “I think there’s a need for continued training, and all directors of all experiences need to attend more and more training in regard to risk,” says Harris.

ABOUT THE SURVEYBank Director conducted a brief survey by phone in April and May of 2013, polling 114 community bank CEOs, presidents and chairmen headquartered in the Western United States. Ninety-eight percent of the respondents were bank CEOs or presidents, and 77 percent represented banks with less than $250 million in assets.

Emily McCormick is the Director of Research for Bank Director, an information resource for directors and officers of financial companies.You can follow her on Twitter at twitter.com/ehmccormick or get connected on LinkedIn. She also blogs at Heart of the Matter.